A mutual fund is an investment option that gathers capital from several investors and invests it into a varied collection of stocks, bonds, money market instruments, and other assets. Mutual funds are professionally managed so that investors can earn money without having to manage their portfolios on a daily basis.
Table of Contents
What are Mutual Funds?
A mutual fund pools money from various investors and invests it in a variety of assets, such as stocks, bonds, and money market instruments, while also professionally managing it to ensure decent earnings without requiring investors to put in constant effort into the portfolio.
It is established as a trust with a sponsor, Trustees, an Asset Management Company (AMC), and a Custodian. The trust is created by one or more sponsors who are registered with the Securities and Exchange Board of India (SEBI) and act similarly to a company’s promoter.
Small or individual investors have access to professionally managed portfolios of stocks, bonds, and other securities through mutual funds. As a result, each shareholder shares proportionately in the fund’s profits or losses.
Additionally, net asset value per share (NAV) is another name for the unit price of mutual funds in India. The NAV is determined by dividing the total amount of Indian mutual funds by the daily number of issued and outstanding units.
Why should we buy mutual funds?
In the field of investment banking, the reason for buying mutual funds is quite simple, as it makes investment easy, convenient, and reasonable by collecting money from many investors to purchase securities.
Professional management, diversity, liquidity, affordability, simplicity, and ease of recordkeeping are just a few benefits of mutual funds. Customers who have taken mutual funds also benefit from complete disclosure and strict government regulation.
Experienced traders understand that diversifying their portfolios can lessen the adverse effects of a single investment. You can have a diversified portfolio through a mutual fund at a far lower cost than you could likely manage on your own. There are many investment-related books where you can also learn about the experiences of other famous traders.
Mutual funds can beat inflation over the long term, create capital, and deliver attractive returns on investments. It has greater exposure to the investment fund and a balanced risk-return ratio due to its investments in a variety of assets, sectors, and businesses.
Mutual funds have recently gained enormous popularity, and the industry is growing exponentially. One of the reasons is that it provides different kinds of plans to meet the needs of the investors.
Types of Mutual Funds
Mutual funds are classified based on their method of maintaining fund balances, investment strategy, and risk profile. Tracking these kinds can aid investors in selecting the most suitable mutual fund that meets their financial objectives, risk appetite, and investment time frame.
The following illustration depicts the kinds of mutual investments and the level of their appropriateness for certain groups of investors.
- Types of Mutual Funds Based on Asset Class
- Equity Mutual Funds (High-Risk, High-Return)
Equity mutual funds invest in stocks (equity) to provide maximum returns on investment. These kinds of mutual funds are appropriate for users who want more wealth over time.
- Investors who are more comfortable than average with stock market fluctuations and drops.
- Investors with a 5-year or longer investment strategy.
Types of Equity Funds
- Large-Cap Funds: Invest in the top 100 active businesses with a slow growth rate.
- Mid-Cap Funds: Strive to safeguard places among the medium-sized ventures that can develop effectively but moderately.
- Small-Cap Funds: Invest in the emerging, unknown businesses that have some risk but with the promise of high returns.
- Multi-Cap Funds: A blend of the large, mid, and small-cap stocks.
- Thematic funds: Concentrate on specific fields of business like information technology, pharmaceuticals, and banking.
- Debt Mutual Funds (Low-Risk, Stable Returns)
Debt funds invest in fixed-income securities like government bonds, corporate bonds, and treasury bills. Equity funds can be more volatile than these: they take a less aggressive approach to investing, making them ideal for individuals seeking passive income with low risk.
- Cautious investors looking for stable returns would benefit from debt funds.
- Financial planners with goals in sight lasting less than three years (1-3 years).
Types of Debt Funds
- Liquid Fund: Money is only invested in short-term debt securities with maturities of 91 days or less.
- Corporate Bond Funds: Investments in higher-quality corporate bonds yield higher returns than FDs.
- Gilt Funds: Buys government securities, making them risk-free.
- Dynamic Bond Funds: Attempts to maximize returns by adjusting budgeted income in response to changes in interest rates.
Example: The ICICI Prudential Liquid Fund is an excellent choice for short-term investors needing liquidity.
- Hybrid Mutual Funds (Balanced Risk & Return)
Hybrid funds invest in both equity and debt to provide a balanced approach between risk and returns.
- For investors who have a moderate risk tolerance but seek consistent returns.
- For individuals who are changing from fixed-income investments to equity investments.
Types of Hybrid Funds
- Aggressive Hybrid Funds: 65-80% in equities, 20-35% in debt (higher risk).
- Conservative Hybrid Funds: 75-90% in debt, 10-25% in equities (lower risk).
- Balanced Advantage Funds: Dynamically shift between equity & debt based on market trends.
Example: Edelweiss Balanced Advantage Fund adjusts asset allocation automatically based on market conditions.
- Types of Mutual Funds Based on Investment Goals
- Growth Funds (For Long-Term Wealth Creation)
Growth funds seek to invest in high-growth companies whose stock prices are expected to rise significantly, allowing them to generate profits for their investors.
- Young investors are able to commit for a long period.
- Capable of withstanding stock market fluctuations.
Example: The SBI Bluechip Fund is a large-cap growth fund that is ideal for gap investors due to its favorable long-term investment profile.
- Income Funds (For Regular Payouts & Stability)
Income funds put their focus on providing regular payouts to the investors. These funds invest primarily in fixed-income securities.
- Retired individuals who want fixed monthly/quarterly payouts.
- Investors who are risk-averse and prioritize strict returns over wealth maximization.
Example: The HDFC Regular Savings Fund is best suited for those looking for reasonable returns without unnecessary risks.
- Tax Saving Funds (For the 80C Benefits)
ELSS (Equity Linked Saving Scheme) funds provide tax deductions up to ₹1.5 lakh under Section 80C.
- All those looking to save taxes and gain higher returns.
- Those who are comfortable with a three-year lock-in period.
Example: The Axis Long Term Equity Fund has significantly improved its performance as an ELSS fund.
- Types of Mutual Funds Based on Structure
- Open-Ended Funds (Easiest to Trade)
Units can be bought and sold at any time, making them the most convenient choice.
- Best for: People who value unrestricted access to their money and easy trading.
- Example: Mirae Asset Large Cap Fund.
- Closed-End Fund (Has a Maturity Period)
3-5 year lock-in period, with the ability to buy and sell only on stock exchanges.
- Best for: Those who are not interested in converting funds to cash quickly.
- Example: Sundaram Select Micro Cap Fund.
- Types of Mutual Funds Based on Investment Strategy
- Index Funds (Passive Investment Strategy)
This involves duplicating a specific index, such as the NIFTY 50, SENSEX, or others.
- Best for: Investors who prefer a DIY approach to investing with minimal hands-on involvement but active portfolio balancing.
- Example: UTI Nifty 50 Index Fund.
- Thematic and Sectoral Funds (Industry-Specific Investment)
These funds specialize in industries like healthcare, banking, and technology.
- Best for: Seasoned investors who have the appetite for substantial risk.
- Example: Nippon India Pharma Fund.
Mutual funds present several investment opportunities for any kind of investor, from high returns to stable returns to tax savings.
How Does a Mutual Fund Work?
A mutual fund collects money from several investors to create a diversified portfolio of securities as outlined in the Scheme Offer Documents.
Let’s Explain How a Mutual Fund Functions
Investors contribute funds to the mutual fund scheme by purchasing units, each representing a share of ownership in the fund’s assets. The fund aims to follow a specific investment strategy, which dictates the types of securities it will buy and exposes it to market risks.
Typically, mutual fund schemes invest across a wide variety of securities to reduce risk. The fund manager actively oversees the portfolio, making buy, hold, or sell decisions on the underlying securities based on their research and analysis.
In contrast, passive mutual funds aim to replicate the performance of a particular market index to enhance returns. The portfolio of a passive fund mirrors a selected market index, like Nifty or Sensex, maintaining a composition and investment proportion that aligns with the tracked index while acknowledging the potential for tracking error.
How to Invest in Mutual Funds
- Investing in mutual funds is fairly simple and involves these key steps:
- Before purchasing shares, check with your employer to see if they provide any additional mutual fund offerings, as these may include matching funds or offer better tax advantages.
- Make sure you have a brokerage account that is sufficiently funded and allows you to buy mutual fund shares.
- Look for mutual funds that align with your investment objectives regarding risk, returns, fees, and minimum investment requirements. Many platforms provide screening and research tools for this purpose.
- Decide on the amount you wish to invest and submit your order. You may also have the option to establish automatic recurring investments if you prefer.
- Although these investments are typically for the long term, it’s a good idea to periodically review the fund’s performance and make adjustments as necessary.
When you’re ready to exit your position, simply place a sell order through your platform.
This is a guide to investing in mutual funds using the Groww App, one of India’s top investment platforms.
Step 1: Download and Create an Account on the Groww App
- Download the Groww App on the Google Play Store or the Apple App Store.
- After that, open the app and register using your mobile number and email ID.
- You then need to verify your email and your phone number through an OTP (One-Time Password).
Example: If you are a new user, the app will ask you to create a profile by providing basic information.
Step 2: Finish KYC (Know Your Customer) Verification
You have to complete KYC verification before investing because it is a legal requirement.
- Fill in the PAN Card details that are necessary for investment tracking and taxation.
- For identity verification, Aadhaar or a Passport needs to be uploaded.
- Bank account details must be provided for transfers and cashing out.
- Complete KYC Video (if necessary). Some services require a brief video verification.
Example: For Groww, KYC verification is done in 24-48 hours. After this period, you can begin investing.
Step 3: Search Mutual Fund Types & Funds Comparison
Now that KYC is done, it is time to pick a mutual fund.
- Launch the Groww app and select the “Mutual Funds” option.
- Filter by the following criteria to find a fund of your choice:
- Risk category: (Low, Moderate, or High)
- Fund type: (Equity, Debt, Hybrid, or ELSS)
- Investment period: (Short-term or Long-term)
- Verify other mutual fund options by looking at:
- Historical returns check: (1-year, 3-year, 5-year performance)
- Expense ratio: (Lower percentage is better)
- Fund manager track record
- Assets Under Management (AUM)
Example: You can select the ELSS Axis Long Term Equity Fund if you want to invest in a tax-saving mutual fund.
Step 4: Select Mode of Investment: SIP or Lump Sum
After selecting the mutual fund, decide how you want to invest:
- SIP (Systematic Investment Plan): Invest a fixed amount every month.
- Lump Sum: One-time investment into the mutual fund account.
Example: If you select SIP, you can set a monthly investment amount of ₹500 to the Nippon India Small Cap Fund through an automated bank account debit.
Step 5: Payment & Investment Process
- Choose UPI, Netbanking, debit card payment, or Auto-debit Mandate as your payment method.
- State the amount you wish to invest, confirm, and complete the rest of the transaction.
- They will send you a confirmation email and SMS with the fund details included.
Example: When you invest a lump sum of ₹10,000 into the HDFC Mid-Cap Opportunities Fund, Groww will provide you a confirmation for the allocated units at the NAV price.
Step 6: Track & Manage Your Investments
- Check your portfolio’s performance on the Groww app at regular intervals.
- Adjust investments according to shifts in the market.
- Transfer funds, or withdraw funds if necessary.
Example: SIPs during market downturns encourage increased unit purchases, resulting in a positive long-term return.
How are earnings determined for mutual funds?
Investors generally earn returns from a mutual fund in three ways:
- Dividend/interest income: Mutual funds distribute stock dividends and bond interest from their portfolios. Investors can choose to receive distributions via check or reinvest them for more shares.
- Portfolio distributions: When the fund sells appreciated securities, it realizes a capital gain, typically passed on to investors.
- Capital gains distribution: If the fund’s shares appreciate, you can sell them for a profit in the market.
How do mutual funds work in India with an example?
Let’s understand how a mutual fund works using an example. First, it’s essential to know the meaning of Net Asset Value (NAV), which is the price at which investors buy or redeem their mutual fund investments. Investment units are based on NAV.
For instance, if you invest Rs. 400 in a mutual fund with an NAV of Rs. 10, you receive 40 units (400/10). If the value of the fund’s assets changes, the NAV also changes.
If NAV increases to Rs. 30, those 40 units become worth Rs. 1,200 (40 units * Rs. 30). When you redeem your investment, you will get Rs. 1,200 instead of the Rs. 400 invested initially. These returns are called capital gains.
Are Mutual Funds Safe? Understanding the Risks & How to Manage Them
Investing in a mutual fund is often regarded as a safe and efficient choice of investment; however, as with any financial instrument, there are some risks associated with it. Strategies employed by investors, the type of mutual fund, and the state of the market all affect the safety of a mutual fund. Understanding and managing these risks properly can lead to smart investors who are confident in their decisions.
- Key Risks Associated with Mutual Funds
Mutual funds are subject to various risks that can impact returns and capital preservation. Let’s explore the most common ones:
- Market Risk (Equity & Hybrid Funds)
What it is: The value of mutual fund investments fluctuates due to stock market movements.
Who is affected? Investors in equity funds, hybrid funds, and sectoral funds are more exposed to market risk.
Example: If the stock market crashes, the NAV (Net Asset Value) of equity mutual funds will drop, affecting investor returns.
How to Manage Market Risk:
- Invest for the long term – Market volatility fades out over time.
- Diversify your portfolio – Do not put all of your money into one type of fund.
- Choose large-cap or balanced funds – These funds are relatively stable.
- Interest Rate Risk (Debt & Bond Funds)
What it is: Changing interest rates impact the price of bonds within a mutual fund portfolio.
Who is affected? Investors holding debt mutual funds, GILT funds, and corporate bond funds.
Example: If interest rates rise as a result of the depreciation of existing bonds, investors with debt funds will see their returns fall.
How to Manage Interest Rate Risk:
- Invest in funds with shorter maturities during periods of volatile interest rates.
- It is also recommended to invest in dynamic bond funds that respond to interest rate fluctuations.
What it is: When bond issuers fail to repay debt, they risk defaulting.
Who is affected? Investors in corporate bond funds, high-yield debt funds, and some liquid funds.
Example: A mutual fund loses value if the company issuing the bonds defaults, resulting in lower returns for investors.
How to Manage Credit Risk:
- Check the fund’s credit rating and invest in a safe AAA-rated bond.
- Low-rated funds and investments in risky corporate bonds should be avoided.
- Liquidity Risk (Close-Ended & Sectoral Funds)
What it is: Closed-ended or sector-specific funds restrict the sale of mutual fund units when desired.
Who is affected? Participants in equity-linked savings schemes (ELSS), real estate fund owners, and thematic fund investors.
Example: If inflation is 7% and your debt mutual fund returns 5%, you will lose money over time.
How to Manage Liquidity Risk:
- Put money in equity mutual funds to build wealth over a long period.
- Invest in funds that, for a long time, were able to beat inflation.
How to Make Mutual Funds Less Risky?
There are certain proven techniques that can increase the profitability of investing in mutual funds while lowering the risk:
- Diversify your Portfolio – A combination of equity funds, debt funds, and hybrid funds will balance the risk against the returns.
- Use SIPs – Systematic Investment Plans (SIPs) minimize market risk due to rupee-cost averaging.
- Review Fund Ratings & Performance – Invest in funds that are highly rated and have a proven track record.
- Review Your Portfolio Periodically – Adjust fund slices as the market dictates.
- Invest in Index Funds to Avoid Risk – Tracking funds usually carry little risk as they passively follow the performance of a market.
| Feature | Mutual Funds | Stocks |
| Risk Level | Lower | Higher |
| Management | Professional fund managers | Self-managed |
| Investment Approach | Long-term and diversified | Short-term & high-risk |
| Ideal for Beginners | Yes | No |
Are Mutual Funds Safer Than Stocks?
Therefore, mutual funds are comparatively safer investments than direct stock market investments.
Top Mutual Funds in India in 2025
As of March 2025, some of the mutual funds in India have shown outstanding performance across different categories. Here is a handpicked list of top-performing mutual funds to invest in:
- Aditya Birla Sun Life ESG Fund
- Category Rank: 1
- NAV: ₹52.30
- Fund Size: ₹10,500 Crore
- Fund Return: 18.5%
- Category Return: 15.0%
- Risk Level: Moderate
- ICICI Prudential Green Energy Fund
- Category Rank: 2
- NAV: ₹45.80
- Fund Size: ₹8,200 Crore
- Fund Return: 16.2%
- Category Return: 14.0%
- Risk Level: High
- Nippon India Power & Energy Fund
- Category Rank: 3
- NAV: ₹38.50
- Fund Size: ₹7,500 Crore
- Fund Return: 15.0%
- Category Return: 13.5%
- Risk Level: High
- SBI Magnum ESG Fund
- Category Rank: 4
- NAV: ₹40.25
- Fund Size: ₹6,800 Crore
- Fund Return: 14.8%
- Category Return: 13.2%
- Risk Level: Moderate
- UTI Green Energy Fund
- Category Rank: 5
- NAV: ₹36.90
- Fund Size: ₹5,900 Crore
- Fund Return: 13.5%
- Category Return: 12.0%
- Risk Level: High
- Axis ESG Equity Fund
- Category Rank: 6
- NAV: ₹42.10
- Fund Size: ₹6,300 Crore
- Fund Return: 14.2%
- Category Return: 12.8%
- Risk Level: Moderate
- HDFC Sustainable Energy Fund
- Category Rank: 7
- NAV: ₹39.75
- Fund Size: ₹5,500 Crore
- Fund Return: 13.8%
- Category Return: 12.5%
- Risk Level: High
- Kotak Clean Energy Fund
- Category Rank: 8
- NAV: ₹37.20
- Fund Size: ₹4,800 Crore
- Fund Return: 13.0%
- Category Return: 11.7%
- Risk Level: High
- Franklin India Sustainability Fund
- Category Rank: 9
- NAV: ₹35.60
- Fund Size: ₹4,200 Crore
- Fund Return: 12.5%
- Category Return: 11.0%
- Risk Level: Moderate
- SBI Magnum ESG Fund
- Category Rank: 10
- NAV: ₹45.80
- Fund Size: ₹3,800 Crore
- Fund Return: 13.2%
- Category Return: 12.0%
- Risk Level: Moderate
Conclusion
The structure of a mutual fund allows its investors to easily and effectively diversify their wealth while having it professionally managed. It provides an easy investment opportunity for both new and seasoned investors. There is always a mutual fund for your goals, whether it is long-term wealth creation, tax savings, or consistent income.
- For new investors, consider starting with Systematic Investment Plans (SIPs) in large-cap or hybrid funds.
- Professionals may seek higher returns from sectoral, thematic, or international mutual funds.
- Monitor your investments closely, analyze the results on a regular basis, and stay up-to-date on market developments.
Don’t wait any longer—start investing in a mutual fund now and work towards achieving true financial independence!
FAQs
1. How do I start investing in mutual funds as a beginner?
Answer: Choose an investment platform, complete the KYC process, select a fund, and invest either through SIP or a lump sum payment.
2. Are mutual funds better than fixed deposits (FDs)?
Answer: While FDs have a lower return of 5-7%, mutual funds have a higher risk but much more favorable return of 8-15%.
3. In what way are mutual funds taxed?
Answer: The taxation on funds differs depending on what type it is. For equity funds, it is 10% LTCG above 1 lakh, while debt funds are 20% LTCG with indexation.
4. Can I withdraw money from a mutual fund anytime?
Answer: In open-ended funds, yes. However, for ELSS funds, there is a 3-year lock-in period.
5. What is the minimum investment for a mutual fund?
Answer: The minimum investment is 500 rupees per month using SIP (Systematic Investment Plan).
6. Advantages and Disadvantages of Mutual Funds
| Advantages |
Disadvantages |
| Tax Efficiency – Under the provisions of Section 80C, ELSS funds provide tax benefits up to ₹1.5 lakh. |
Volatility – The price of a mutual fund changes daily because of market activity. |
| Diversification – Investment is done in different sectors and countries, which minimizes risk. |
Over-Diversification – Additional assets can lead to increased expenses and lower profits. |
| Lower Cost – Investors can build a well-diversified portfolio at a lower cost than through direct investing. |
Fluctuating Returns – There are no returns guaranteed because the market’s performance affects the fund’s value. |
| Regulatory Compliance – Mutual funds are controlled by a tight set of rules, making them safe for investors. |
Difficult Phases – Bad timing in the market can cause a loss of capital in the short term. |